Tax reliefs

In a report today describing the ‘landscape’ of tax reliefs in the UK, the National Audit Office has indicated that it intends to carry out future work evaluating how tax reliefs are developed, implemented and administered.

Today’s report also covers how the exchequer departments assess the performance of reliefs and how they assess, monitor and respond to the risk that reliefs are abused.

Tax reliefs are a longstanding element of fiscal policy, and are growing in number, with more than 1,000 reliefs in the UK tax system. All tax systems include such reliefs, which in many cases are an essential part of defining the scope and structure of a tax. They require effective administration as their number, as well as the interaction between them, means there may be unintended consequences, creating opportunities for those seeking to avoid and evade tax.

Some reliefs, known as ‘tax expenditures’, are often used as an alternative to public expenditure and have similar effects. They may be designed to achieve particular policy objectives by incentivizing certain behaviour through the tax system. Tax reliefs and credits, for example, are available to companies to encourage research and development activity, a policy objective that has also been pursued through grant funding. The summed annual cost of tax expenditures is around £100 billion.

According to the NAO, HMRC is responding to the challenge of administering reliefs and of addressing the abuse of tax rules: for example, by adding 100 more investigators and extra risk and intelligence staff to identify and deal with avoidance and evasion by the wealthiest individuals. The Department also checks taxpayer returns against other data sources, including whether a taxpayer uses a registered avoidance scheme.

Monitoring arrangements for reliefs vary across HMRC, and few evaluations are commissioned. Monitoring and evaluation are important to understand the extent to which a tax relief is misused. For a tax expenditure, it is also necessary to understand the behavioural consequences of the relief and whether it is meeting its social or economic objectives. There is also limited monitoring of changes in the cost of particular reliefs. Around a quarter of 92 principal reliefs examined by the NAO had experienced significant changes in value.

Although today’s report describes the complete landscape of tax reliefs, the NAO intends to evaluate the administration of particular reliefs in work to be published later this year.

“Tax reliefs are a powerful, important and long-standing element in our public finance system. However, their implementation is subject to less independent scrutiny that that of other instruments of public policy. The intention of this report is to put Parliament in a position to consider whether the major elements in the management and responsiveness of the system of tax reliefs are working adequately or are in need of further attention.”

Amyas Morse, head of the National Audit Office

Notes for Editors

1,128

Number of tax reliefs enacted for individuals and businesses as at March 2013.

180

Tax reliefs for which HMRC has estimated a cost.

£101bn

Summed cost of 'tax expenditures' (those reliefs with similar objectives to spending programmes.

UK tax revenue £476bn

UK tax revenue collected by HM Revenue & Customs in 2012-13.

UK tax gap 7%

The tax gap in 2011-12 was £35 billion, or 7% of tax liabilities in that year.

1. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained by using the relevant links on our website.

2.The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 860 staff. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of almost £1.2 billion in 2012.